This article first appeared in The Edge Malaysia Weekly on November 25, 2024 - December 1, 2024

Normally, a company should be able to fund its working capital from its operations. It is not healthy to keep operations running by using money from borrowings or funds kept for expansion.

In the case of Cape EMS Bhd (KL:CEB) — which only went public in March last year — it is already planning to use proceeds raised from its listing to fund its working capital. In its latest bourse announcement, it said that the board had decided to reallocate an additional RM38.2 million as working capital.

Now, the money raised from its public share sale was supposed to be utilised for the construction of a new cleanroom facility and the purchase of an automated production line for its electronics manufacturing services. 

But the company stated that it had to scale down on its expansion as a customer involved in the manufacturing and distribution of electronic cigarettes had revised its order downwards. It also stated that the decision to not purchase the automated system was because it had enhanced the existing production line.

Cape EMS raised RM155.7 million from its listing exercise. In the original plan, it had set aside RM20.5 million, or a mere 13%, for working capital. Following a variation in the utilisation of the listing proceeds that was announced last week, the company will be using RM60.9 million for working capital — almost three times more than it had originally allocated and nearly 40% of the listing proceeds.

Which begs the question: If initial public offering investors had known about the variation in the utilisation of the listing proceeds, would they have subscribed to the shares?

Also, should the company have explored the option of declaring the unutilised portion as dividends as a measure to return some money to shareholders?

Cape EMS registered a loss in its latest quarterly results. In August, its share price had tumbled because of margin calls suffered by its major shareholder. In the selldown, Cape EMS group CEO and managing director Christina Tee saw her stake cut significantly to 11.1% from 38.4%.

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